Want to learn how to make money investing in China?
- Jul 08, 2005
- admin
- Investing
SIZE DOES MATTER.
Just ask any Chinese person.
They know that the reason every corporation in the world is running
to do business there is the prospect of selling to 1.3 BILLION
people.
That’s 25% of the world’s customers . . . er . . . population –
all in one place.
But the fact is that just because such a big market exists doesn’t
mean you’ll be able to profit from it.
Sure, somewhere inside the country the next “Bill Gates” is
creating the Chinese version of Microsoft (SYM: MSFT).
And in another part of the country, a Chinese Michael Dell is
building the next version of Dell Computer (SYM: DELL).
But finding – and profiting – from these opportunities carries as
much risk as it does reward.
George Soros, the famed investor and member of the Forbes 400
list, is fond of saying that he’s not a “security analyst or a
stock analyst.” Instead, he likens what he does to being an
“insecurity analyst.”
Mr. Soros’ recent political aspirations aside, his point is
well taken: it pays to carefully look at everything that can
go wrong with an investment before committing a single penny
to it.
It is in light of this that we offer you our 5 Most Important
Rules to Investing in China.
But these rules don’t only apply to China. They apply to
any developing country at any time in its economic
development.
Why have rules? Because we believe that something can always
go wrong.
Feel free to call us paranoid: Experience has taught us
(often the hard way) that a fool and his money are lucky
enough to get together in the first place.
INVESTING IN CHINA RULE #1:
BEFORE YOU INVEST IN CHINA BE AWARE THAT DOING SO CARRIES
SIGNIFICANT POLITICAL RISK.
With everybody so bullish on China these days it’s sometimes
easy to forget that China is still a developing country with
a Communist political system.
Not only do people forget this, but many folks seem ready
to anoint China as the world’s greatest superpower.
They assume a growth trajectory that shoots straight up
with no internal or external interference.
Having spent my entire lifetime studying both financial and
political history, I have one thing to say to those people:
Not so fast, folks.
In fact, the people who are offering China the crown of
“superpower” would do very well to read a bit of history
themselves.
And since human nature doesn’t change, history tends to repeat
itself over and over again.
That’s why I find the recent talk about China becoming more
and more irrational the longer I hear it – just like the peak
of every bull market throughout history.
Perhaps the most disturbing thing I’ve heard recently has been
pundits on television suggesting that China will prove to the
world that you don’t have to choose between the Western model
of democracy/capitalism OR the old Soviet model of
communism/socialism.
China, they argue, is proving that you can have a communist
political system and a capitalist economy all under one roof.
I call it the “INDIA ARGUMENT” because the people touting it
believe that India’s slow democratic decision-making holds it
back from the fast economic growth China currently enjoys.
That sounds an awful like the DOT-COM argument of, “But this time
things are really different.”
BELIEVING SUCH FOLLY IGNORES HISTORY AND IS VERY RISKY.
Let me explain why:
Right now all major decisions are centrally planned, through
the Communist party.
But as economic growth spreads across the land, the balance of
power will SHIFT AWAY FROM the Communist party INTO THE HANDS
of the capitalist companies/people creating all the jobs and
making all the money.
That means that the hundreds of politicians who run the country
now will see their power shift to thousands of corporate
participants; into a system of decentralized decision-making.
This shift in the balance of power is what will enable
Corporate China to demand a bigger say in how
Political China is being run.
It’s at this point that Political China – whose primary goal
is to create jobs and provide stability – will realize that
it needs to do what Corporate China wants in order to maintain
stability.
Take Intellectual Property Rights as a simplified, but
revealing example.
Currently, we take for granted here in the US the right to
protect our intellectual property.
CEO’s and entrepreneurs know that if they invent a product,
competitors can’t steal it without repercussion.
Sure, it might take a long court battle, but recourse usually
comes. In the US, we know that if anybody steals our
property we can utilize an independent judiciary to get
it back.
If Corporate China can’t get the same assurances, then
that will stifle growth, because they won’t invest big
sums of money for fear of losing it.
Without investing in new products, jobs won’t be created.
Without jobs, the economy suffers. When the economy suffers,
Political China is at risk of losing its power.
Thus, creating an independent judiciary that will, at the
very least, protect capitalist intellectual property, must
be done to insure stability of the country. It’s one of the
bedrocks of a market-based system.
The problem is that it conflicts directly with a one-party
Communist system.
Let me explain:
For an independent judiciary to protect intellectual property,
truth and transparency are required.
For a Communist party to maintain control, secrecy is
required.
Obviously this is a conflict between Corporate China and
Political China that will be won by the group with the most
power.
That group will be the people that provide jobs (stability).
I have no doubt that in the long-term, Corporate China will
run the country and the government will become a tool of Big
Business – just like in the US.
But in the short-term, shifting the balance of power from
one group to another poses significant political and
financial risks to investors.
That’s because history has proven time and time again that
people don’t easily give up the reins of power.
Except, of course, in the case of our country. We could thank
George Washington for that special gift.
RULE #2 IS COMING NEXT WEEK: STAY TUNED
Remember – You Are What YOu Read.
–By Dylan Jovine